Reeves Utility Income Fund (UTG) is a closed end fund that invests at least 80% of its funds in companies that are involved with the generation or distribution of electricity, gas, or water; telecommunications; or infrastructure operations such as airports, toll roads, etc. They strive to provide a high level of income and also a high total return though capital appreciation.
Closed end funds trade like stocks and can be trading at a premium or a discount to their net asset value (NAV). The NAV is the total value of the underlying investments owned by the fund. If the fund trades at a 5% discount, you are buying $1.00 of assets for 95 cents. If possible, it is better to buy a closed end fund at a discount, and wait for the share price to go up to, or over the NAV. Recently, UTG traded at a 1.21% premium, meaning the market is valuing its assets 1.21% more than what they are worth if the fund was liquidated. UTG has averaged a premium of .38% over the last year, with a high of a 6.57% premium and a low of a 3.72% discount.
At the recent price of $30.02, the Reeves Utility Income Fund has an annual distribution yield of 7.59%. UTG pays out $.19 monthly, providing monthly income for its shareholders. This monthly payout can help your investment compound more quickly if you are reinvesting your distributions, or it can help pay for monthly bills if you are taking it in cash. Closed end funds can use income, long term gains, short term gains, and return of capital to make up their distributions. UTG has used tax favored income and long term gains for its distributions in the past year and has avoided short term gains and return of capital. One reason UTG can pay out such a high yield is that they use leverage. UTG has an effective leverage rate of 18.19%. That means they have borrowed to buy investments and hopefully increase their return by doing so.
The top 5 holdings include BCE, Ameren Corp, Duke Energy, Entergy Corp and Public Service Enterprise Group. Utility companies tend to decline in high interest rate environments because bonds typically yield more when interest rates increase. Utilities are seen as a bond substitute because they usually have a reliable dividend payout similar to a bond’s interest payments. UTG is down 9.6% year to date. It hit a low of $24.55 back in October but has worked its way back up to about $30.00 recently. Most of the past year, UTG has traded between $30 and $35, but has been below $30 since September. I think the stock price will stabilize in the low $30’s once the Fed stops raising interest rates. If UTG’s share price drops down to the mid 20’s, and it is trading at a discount to the NAV, it may be worth looking at. Watch for a reaction when the Fed raises interest rates.
I like UTG for its yield and own shares of this fund. As always, do your own due diligence. Sources include Fidelity, Schwab, and CEFconnect.
(Intentional Investing is a weekly column written by Kyle Smith from Floyd County, TX, based upon his investment knowledge and does not represent the views or opinions of the Floyd County Record. You can reach Mr. Smith via email at insureddividends@gmail.com)
